Tax Bites: The application of the new base rate entity legislation to corporate beneficiaries

With Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2018 now having passed both the House of Representatives and the Senate, the Bill will shortly receive royal assent and become legislation (with application effective from 1 July 2017).

The new legislation seeks to clarify when a company shall be considered to be a base rate entity and be eligible to access the 27.5% corporate tax rate rather than the 30% corporate tax rate where it otherwise satisfies the maximum turnover threshold ($50M for the 2019 financial year).

In relation to corporate beneficiaries, the new legislation prescribes that the corporate beneficiary will be eligible to be classified as a base rate entity and be taxed at the 27.5% company tax rate if it satisfies the turnover threshold ($50M for the 2019 financial year) and no more than 80% of the trust distributions it receives from trusts is from passive sources (eg from rental income, dividend income, interest income etc).

In relation to the imputation of dividends however, Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2018 prescribes that the rate of the imputation credit attaching to a dividend is determined having regard to (i) the turnover of the company in the prior year; and (ii) whether the company was a base rate entity in the prior year.

For corporate beneficiaries that have significant accumulated retained earnings in them however, the amendments made in the new legislation may be detrimental.  This is because going forward, where the company continues to receive distributions from trusts which are sourced from non-passive sources, the company may be limited to franking dividends to 27.5% even though it has previously paid company tax on its accumulated profits at the rate of 30%.

The above problem may require consideration of quarantining existing corporate beneficiary companies which hold existing accumulated profits to ensure the corporate beneficiary can continue to frank dividends at the 30% rate.

If you have any further questions, please do not hesitate to contact Tim Olynyk on (03) 9810 0700 or at t.olynyk@banksgroup.com.au.

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